The price of a barrel of oil has now increased by over 76% since the middle of June last year, writes Jim Power
This week, the international credit ratings agency Moody’s revised up its 2018 growth forecast for Ireland to 5% from 3.7%, and it is forecasting growth of 3.5% for next year.
It bases its upward revision on strong consumer spending and residential housing investment. It warned of the dangers to Ireland posed by Brexit; the corporation tax reforms being implemented by President Trump and other international corporation tax developments.
Nothing unusual or unbelievable about any of this and it is certainly consistent with everything we see in the economy at the moment.
Sensibly, Moody’s warned about Ireland’s national debt vulnerability which has a much more positive gloss than is warranted due to the exaggerated nature of Ireland’s GDP. Caution should be the byword.
The latest fiscal projections from the Department of Finance suggest that there would be “fiscal space” of €3.2bn available to the minister for finance as he frames Budget 2019 over the coming weeks and months.
Of this fiscal space, €1.4bn will be soaked up by government expenditure commitments already entered in to, and €500m will go into the ‘rainy day’ fund that is sensibly being set up by the minister to help deal with future shocks.
It is a bit like the National Pension Reserve Fund that was set up many years ago by Charlie McCreevy specifically to cover public pension liabilities from 2025 onwards. Sadly, that fund was mostly used up in rescuing our collapsing banking system. The rainy-day fund does not have a specific purpose laid out for it, other than to act as buffer for future shocks.
While €500m is a tiny amount of money and would not be sufficient to provide any real protection, it will hopefully be allowed build up over the coming years, and more importantly, one hopes that there will be no need to use it.
Inevitably, there will be a need to use it of course.
After all of this, it is envisaged that the minister will have €1.3bn available in the budget to allocate to tax cuts and other expenditure increases.
This amount of money is not sufficiently large to make any real difference as it will likely be dispersed very thinly across the economy.
It would be good if it were all used to increase frontline staff such as nurses in the health service or guards on the streets, but the political realities suggest that it will most likely be spread very thinly across the economy and make no real difference to anybody.
On a positive external note, it would appear that US president Donald Trump’s tit-for-tat trade issue with China is starting to dissipate as pragmatism and good sense appear to be gaining the upper hand.
For a very open economy like Ireland’s, growth of protectionism would be unambiguously negative.
Hopefully, such sense and pragmatism will also win out in relation to Brexit.
One worrying external development at the moment is the onward ascent of oil prices.
The price of a barrel of oil is currently touching $80 per barrel and has now increased by over 76% since the middle of June last year.
Prices are being driven higher by increased demand on the back of the strong cyclical upswing in the global economy, threatened sanctions against Iran and better co-operation amongst OPEC members to curtail oil supply.
It is also the case that the fracking revolution in the US has been struggling to remain financially viable and supply has suffered.
One way or another, for an energy import dependent country like Ireland, this will put further pressure on personal finances.
In the year to April, petrol prices increased by 0.7% and diesel prices by just 0.9%.
These price levels are not yet reflecting the increase in the price of oil but will over the coming months, assuming — as appears likely — the current pressure on oil prices persists.
This will squeeze even more money from the already-pressurised personal sector.
The latest oil price developments highlight, once again, the necessity to reduce our dependence on imported oil and up the ante on developing alternative energy sources.
This pressure to move faster should, of course, be compounded by the EU fines coming down the road if we do not meet our carbon targets, which we won’t.
© Irish Examiner Ltd. All rights reserved